CFPB Clarifies “Abusive” Practices
The Dodd-Frank Act gives the Consumer Financial Protection Bureau authority to prevent unfair, deceptive or abusive acts or practices. The terms “unfair” and “deceptive” are quite vague, but have long been defined under the Federal Trade Commission’s “UDAP” authority. However, “abusive” was newly introduced into the CFPB’s founding statute – turning “UDAP” into “UDAAP.”
Section 1031(d) of the Dodd-Frank Act provides limited detail. Specifically, an abusive act: either (1) materially interferes with a consumer’s ability to understand a term or condition of a consumer financial product or service, or (2) takes unreasonable advantage of: (a) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service, (b) a consumer’s inability to protect his or her interests in selecting or using a consumer product or service, or (c) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. Dodd-Frank does not further expand on this text with specific examples, nor does the legislative history provide detailed meaning about the intent of the “abusive” provision.
Since the CFPB’s founding, industry participants have expressed concern regarding the breadth and ambiguity of the “abusive” authority. The CFPB has applied the abusiveness standard on a number of occasions, but almost always in conjunction with the terms unfair or deceptive. Thus, there continues to be little clarity on those considered abusive. The most recent example, is the consent order with a group of consumer lenders announced this month. In that case, the Bureau alleged that the lenders engaged in unfair, deceptive, and abusive acts and practices in connection with the illegal collection of loans that were void in whole or in part under state laws governing interest rates caps, licensing, or both.
In its most recent Policy Statement, the CFPB acknowledges the uncertainty and attempts to provide greater clarity. The agency also indicates that part of the motivation for clarifying is to avoid “imposing substantial costs, including impeding innovation” on the industry. The Policy Statement indicates that the abusiveness standard will be limited in at least the following ways:
· Cost/Benefit Analysis – The CFPB will cite conduct as abusive only if the costs to consumers outweigh the benefits (including the impact on access to credit)
· Avoiding Dual Pleading – The CFPB will avoid challenging conduct as abusive that relies on all or nearly all of the same facts the Bureau alleges to be are unfair or deceptive
· Monetary Relief – The CFPB will not impose civil penalties on companies who make a good-faith effort to comply with the abusiveness standard (although it will continue to seek restitution for consumers harmed by the underlying acts)
Clarification is generally always welcome. However, this clarification does not give examples of abusiveness or further explain existing commentary on abusive acts. The Bureau does add the cost/benefit analysis to the standard. We can imagine parties asking whether the cost/benefit analysis reflects Congressional intent, especially given that the unfairness doctrine explicitly includes such a balance while the deceptiveness doctrine does not (suggesting that had Congress intended to include such a consideration in the abusiveness standard it would have done so).
The Policy Statement also suggests that the agency’s interpretation trends constrictive. Also, even if the CFPB cites a company for an abusive act, penalties may be limited as long as the company has made a “good-faith” effort to comply with the abusiveness standard. In this regard, financial services providers may want to take care to clearly articulate and document the reasons products or services do not meet the abusiveness standard laid out in Dodd-Frank.
Garris Horn frequently provides guidance on CFPB compliance and defense matters. For more information, or to discuss related matters, contact Troy Garris directly at 301-461-8952 or troy@garrishorn.com.
